Wednesday, 28 November 2012

An important factor behind this broad-based weakness in manufacturing was weakness in the domestic construction sector. Construction activity contracted by 22 percent between the December quarter 2007 and the December quarter 2009, and remained low in the following years. As we saw in figure 10, construction is highly dependent upon manufactured inputs. The fall in construction activity represented a significant decline in demand for the manufacturing industry. The elasticity shown in figure 10 implies that the construction industry contraction that took place between December 2007 and June 2012 is consistent, by itself, with a cumulative 8.5 percent fall in manufacturing activity – quite close to the fall that actually occurred (figure 16). Construction activity has remained very weak following the recession in various other advanced economies, and this weakness is reflected in the manufacturing output of those countries too (the United Kingdom is an example).

It would be one thing if the recession had dampened demand for residential construction; it then would be desirable to shift resources out of manufacturing for that sector and into other areas. But that really doesn't seem to be the problem - New Zealand property indices have housing above 2007 peak prices in Auckland and Christchurch; demand seems robust. Rather, Councils have effectively made it illegal to build new houses.

It's also mildly amusing that some of the same folks who shout loudest about declining manufacturing are also the folks who most strongly support heavy restrictions on residential construction. The two things are kinda linked.

There are real risks from badly managed natural gas extraction. Those can either be mitigated by well designed regulation mandating cost-effective best practice, or through use of a liability regime mandating that an extracting company post a bond (or demonstrate insurance) sufficient to compensate against worst-case water contamination. The latter being pretty unlikely to happen here any time soon, regulation seems the more effective way of ensuring against the socialisation of downside risk.

“This is a timely and balanced report that sets out the concerns in New Zealand about possible environmental impacts of hydraulic fracturing in the oil and gas industry. Dr Wright has put fracking into context as a possible part of the life cycle of planning, drilling, operating and abandoning a well. She concludes that she has not seen anything that is a high and urgent concern that would warrant calling for a moratorium on hydraulic fracturing in New Zealand. The report rightly focuses on the need for effective regulation and enforcement in order to ensure the safe operation of hydraulic fracturing in New Zealand.”

The Greens continue to call for a moratorium on fracking until it can be proven safe. I'm not sure that there is any level of regulation that they would deem consistent with fracking being proven safe. Here's the Green Party press release.

Mr Hughes urged the Government and councils to take a safety-first approach and put a halt on fracking until we have strong regulations in place to ensure the health of people and the environment.

"The fact that the PCE cannot not guarantee that world best practice is being implemented in New Zealand and has pointed out many potential gaps in regulation is in itself a compelling case to implement a moratorium on fracking.

"The PCE has identified numerous ways in which fracking can cause environmental harm, and said, "the potential for important aquifers to be contaminated as a result of fracking is very real.'

Gareth Hughes' tweet here was mildly amusing:

PCE report says Frackers do not have a social license to operate, regulation fragmented & light-handed & water contamination risk very real
— Gareth Hughes (@GarethMP) November 27, 2012

The PCE report says that industry needs to do more to earn a social license to frack - it has to engage and consult with the public to tell them what they're doing. Here's the report:

In New Zealand, it appears that fracking has not yet earned its 'social licence'. Concerns about fracking are many and wide-ranging. They include the potential for contamination of important aquifers, triggering earthquakes, whether regulators have the capacity to deal adequately with concerns, as well as the impact on climate change. The concerns are not just environmental; some are questioning to whom and where the economic benefit will accrue. Increasing public understanding of the technology should help address some concerns. There may well be some changes in public engagement that could help – for example, combining regional council and district council hearings on applications for resource consents. But ultimately what is needed is trust – trustthat government oversight is occurring, and that regulation is not just adequate but enforced, and seen to be so.

One of the reasons that industry has to work hard to increase public understanding of the technology is the scaremongering campaign run by the Greens; they then fault industry for not having sufficiently assuaged the fears that the Greens helped stoke. PCE hasn't endorsed the regulations we do have, but sees no need to put in any interim moratorium.

It will be interesting to see what the Greens do when the Second Report comes out. If tightened regulations are recommended as sufficient, will the Greens support those recommendations, or will they stick to the more Gaia-based policy line?

There’s little new in all this. Last year, a coalition of preventive health groups demanded the Victorian government move to curb the number of liquor licences. Between trying to reduce the number of alcohol retailers and using taxation to increase the price, the preventive health industry has moved precisely nowhere in over 250 years since the Gin Craze of 18th century England. In what has been called the first drug scare in history, mid-18th century British governments, spurred by an outraged middle class, used exactly the same tactics to attack the prevalence of gin consumption among poorer English people who, it was felt, drank too much and didn’t work hard enough.

It’s fascinating how little the justification for such crackdowns has changed. Attempts to regulate and tax gin out of the reach of poorer people were justified by not merely by moral righteousness but on economic grounds: gin was damaging the capacity of English women to produce children, and consumption of gin caused poverty and idleness in an economy struggling to compete with its European rivals.

The economic justification is no longer couched in such melodramatic terms. Instead, it relies on QALYs — Quality Adjusted Life Years, and AWE-based calculations of lost productivity. But the motivation remains the same: social élites anxious to impose control on what they disapprove of. The big difference now is that nearly all of this is taxpayer-funded: we are paying these élites to rationalise banning, taxing and using surveillance over what they disapprove of.

Rational thinking: This is not a moral case. There are social, health and economic arguments that fully justify acting to reduce the more than $10 billion a year cost to government. These are tangible alcohol-related police, justice and health care costs that far exceed the $6 billion of alcohol tax collected each year.

I think Dr Crampton is missing the point. I for one will not vote for (or against) government policy because the costs of death and suffering have been estimated at $5 billion, any more than I would if they were estimated at $10 billion or $100 billion.
...
Perhaps Dr Crampton – and the alcohol industry – could spend a little less time arguing the exact calculation of the financial costs of alcohol and think about the real costs. I am sure that every parent who has lost a teenager from alcohol misuse would estimate that single cost at much more that $15 billion.

So the numbers don't matter, except when they support her.

And, except that the FARE report didn't find anywhere near a $10b cost to the government, or "alcohol-related police, justice and health care costs" in excess of $6b.

Ok. Police, hospital, counselling, and child protection sum to just under $2 billion. If we add in theft and burglary, and property damage, we can get to $3802 - but most of those costs fall on private third parties, not on government.

There is absolutely no way we can get a $10b cost to the government out of the FARE report. Why? Just look at the table! $9 billion of the $15 billion cited are intangible costs of lost life and lost quality of life. Neither of those are a cost to the government.

I've not gone through the new FARE / Marsden Jacob report in great depth as yet, though as semester's now finished, that may change. Their numbers on crime are pretty close to what I'd found; on others, we've some differences.

Keane responds to Jones and Thorn, pointing out some of the stats showing there to be no particular crisis in Australian alcohol consumption. Things aren't that different on this side of the ditch.

Friday, 23 November 2012

Christchurch-based Offsetting readers are warmly invited to attend next week's University of Canterbury "What If?" lecture. I'll there be talking about alcohol. I've copied below from the University's promo page:

In his review of New Zealand's alcohol legislation, Law Commissioner Rt. Hon. Sir Geoffrey Palmer pointed to the large gap between alcohol's social costs, estimated at $5.3 billion, and the excise tax take of $795 million as justifying much tighter controls. But what if the cost figure were wildly wrong? Should we really consider, for example, $700 million of drinkers' own expenditures on alcohol as a social cost? Dr. Crampton will discuss his work comparing social costs, as measured in the public health literature, with more standard economic notions of cost. For economic numbers to meaningfully inform policy, they must be produced using standard economic methods that allow comparison of costs across different policy areas. Dr. Crampton will then discuss the influence of bad statistics around alcohol on the Law Commission's review and on legislation before noting some of the other, less publicized, findings around alcohol and moderate drinking. While the harms from hazardous drinking are very real, exaggerating alcohol's harmful effects while ignoring moderate drinkers' enjoyment makes for poor policy.

Date: Wednesday 28 NovemberTime:7.30 – 9.00pm

Unfortunately, the University's RSVP system for the talks routes through the University's course enrolment system, which makes it really easy for current students but rather a hassle for anyone else. Offsetting readers should feel free to just show up. Loyal readers planning on being in attendance should drop me a note that we might grab a drink afterwards.

The New Zealand Drug Foundation's submission on alcohol reform legislation included this factoid on total alcohol consumption.

Myth: Alcohol consumption has remained the same despite liberalisation of our liquor laws.

Fact: Total alcohol consumption has increased over the past decade. Total alcohol available for consumption (calculated from production, imports and exports) increased by 9.4% between 1998 and 2009 according to official data from Statistics New Zealand. This increase coincided with some of the most significant changes relaxing our liquor laws (e.g. purchase age lowered to 18, supermarkets allowed to sell beer and wine, Sunday trading allowed, starting time for alcohol advertisements on TV brought forward to 8:30pm from 9:00pm. Regardless of per capita consumption, it is how we are drinking that is even more important. There is clear evidence over the last decade that binge drinking is increasing.

I can't link directly to the Stats NZ series; InfoShare is horrible on this one. You get a session link that expires and no permalink to the data series. Go to their search function, type "alcohol", and select the series "Litres of Alcohol Per Head of Population (Annual - Sep)" - that's the most recently updated one.

The first thing you'll notice is that, when you choose years, you can go back to 1986. So you should wonder why they chose 1998 as starting point. There was some liberalisation in 1999, but even then you'd want some sense of whether the prior trend were increasing or decreasing to get a handle on whether there could have been a regulatory structural break in the data.

If you look at alcohol per capita, you get about a 4% increase from 1998 to 2009. If you look instead at total alcohol without adjusting for population, you get a 25% increase; I'm not quite sure where 9.4% comes from.

1989: Liquor licensing liberalised: previously based on community "need", now and "suitable" applicant with planning consent gets a licence (number of licences doubles in early 1990s), 24-hour opening allowed, supermarkets can sell wine.

If liberalisation is what causes big increases in consumption, we'd expect that the trend that NZ Drug cites from 1998 onwards is the continuation of a big increase in consumption. [Update: Jackson really helpfully points to NZ Drug Foundation's direct-link timeline.

Here's what we get when we extend the data series.

There was a substantial drop from 1986 through 1997, from over 12 litres per person aged 18+ to just under 9 litres. Since then, it's come back up to around 10 litres, with a bit of bouncing around that value. By 1989's reforms, alcohol available for consumption had dropped to about 90% of its 1986 value. It dropped by 1997 to 73% of the 1986 value. And we're now at about 80% of the 1986 value.

So the NZ Drug Foundation is entirely right that there was an increase since 1998 and that there has been liberalisation since 1998. But 1998 was awfully close to the series minimum, the period prior to 1998 experienced strong decreases in total per capita alcohol available for consumption, and it's debatable whether the 1989 or 1999 changes were the greater liberalisation.

I don't mean to pick too much on the Drug Foundation here; I've seen all kinds of folks pointing to the increase in consumption over the last decade without noting the much larger drop over the prior decade. And, they're being kind enough to print my summary of the lit on the J-Curve. NZ Drug was just the first place I could find it when writing up the post.

There's a small increase in problem drinking among most age cohorts and a small decrease for one age cohort. I've never been able to see much evidence of a crisis in this graph.

One lesson for journalists in New Zealand: whenever anybody gives you a New Zealand data series that has a start year that isn't 1986, go to Stats NZ and extend the data series. A whole pile of NZ data starts at 1986; if the data you've been given doesn't have a 1986 start point, you might want to check if there's any reason why.

Thursday, 22 November 2012

Bryan Caplan tells us that because the return to parental input is low, we can all ease up on the parental production function. Parents agonise about whether they're doing enough; the ones who do so-agonise are usually doing far too much on any rational cost-benefit calculation. Conclusion? Spread the same amount of total effort over more kids. The reduction in average child quality really won't be that big and you'll be a lot happier in your old age.

But Bryan errs a bit. He neglects that we also could be putting too much effort into antenatal care. Sure sure, there's a big left tail that are screwing up horribly on that front. But that tail isn't reading economics blogs or parenting books written by economists. Instead, the folks who do read econ blogs are busily beating themselves up for having a bit of soft cheese or sneaking a sip of wine during pregnancy. If we are erring in making pregnancy far more costly for our wives than it really needs to be, then we're really screwing up: no matter how convinced we are about Bryan's arguments, if pregnancy is really unpleasant, that up-front cost can kill our future potential unrealised children.*

Emily Oster's forthcoming book then will be a beautiful complement to Bryan's work. Amazon should sell them as a bundle. Doctors, midwives, and right-thinking-tut-tutting-jerks give us all kinds of advice about what good people do. A lot of those really just seemed to be nonsense.

Take alcohol. When we were expecting, none of the advice on alcohol seemed to make sense. Sure, getting drunk seemed a really bad idea. But the dose always makes the poison. So I went and checked the literature and concluded that light drinking during pregnancy was effectively harmless. So Susan had the occasional glass of wine; we were also big fans of Harrington's SobeRing Thought - the low alcohol beer that local brewer Harrington's made for the Lord of the Rings.** And I blogged a bit on how the risks of alcohol during pregnancy seem overstated: if anything, public health folks' warnings that there's no safe level of drinking seem a noble lie intended to dissuade those pregnant women who'd otherwise drink a bottle of scotch in an evening.

If you can't have a glass of wine with dinner every other night during pregnancy, then pregnancy is less fun than it otherwise would be. And so the kind of people who listen to this kind of advice are having too few kids.

Oster seems to have been as annoyed as we were. But she's done something far more constructive about it - she's compiled the evidence for those of us who care about evidence. From the Amazon blurb:

When Oster was expecting her first child, she felt powerless to make the right decisions for her pregnancy. How doctors think and what patients need are two very different things. So Oster drew on her own experience and went in search of the real facts about pregnancy using an economist’s tools. Economics is not just a study of finance. It’s the science of determining value and making informed decisions. To make a good decision, you need to understand the information available to you and to know what it means to you as an individual.

Take alcohol. We all know that Americans are cautious about drinking during pregnancy. Official recommendations call for abstinence. But Oster argues that the medical research doesn’t support this; the vast majority of studies show no impact from an occasional drink. The few studies that do condemn light drinking are deeply flawed, including one in which the light drinkers were also heavy cocaine users.

Expecting Better overturns standard recommendations for alcohol, caffeine, sushi, bed rest, and induction while putting in context the blanket guidelines for fetal testing, weight gain, risks of pregnancy over the age of thirty-five, and nausea, among others.

The tut-tutters are doing real harm here. Lower decile groups hear the "drink nothing" warnings, dismiss them entirely as nonsense, and go on to drink way too much while pregnant, doing real harm. High decile groups hear the "drink nothing" warnings and, adding that to all the other advice they're given about all the other costly-and-useless rituals they must follow during pregnancy, rationally decide to have fewer kids. This is a bad equilibrium. Shame that Oster's book won't be out for another year - the current equilibrium is costly, and the faster we can start fixing it, the better.

* As clarification: there's some optimal number of kids that each couple will decide to have. If the actual cost of having one more kid is lower than the cost parents think they have to face, or the cost they mistakenly decide to impose upon themselves, then optimal family size is a bit larger than the deciding-couple thinks. The deadweight costs of kids who optimally would be born from the parents' perspective but aren't born because of parental cost misperceptions is the problem - I don't think I'm pushing into Parfit territory here. But the problem is my wording, now clarified. Thanks

[UPDATE: January 2015. The post below dates from November 2012 when New Zealand's Sky TV first introduced the WASP in coverage of domestic limited overs cricket. For fans coming here as a result of its being used in the current NZ v SL series, please see here for an FAQ. For an explanation of what cricket has to do with Economics, see here; and for all the cricket posts on Offsetting Behaviour, see here.]

In their coverage of the Wellington-Auckland game in the HRV cup last Friday, Sky Sport introduced WASP—the “winning and score predictor” for use in limited-overs games, either 50-over or 20-20 format. In the first innings, the WASP gives a predicted score. In the second innings, it gives a probability of the batting team winning the match.

I am very happy about this as it is based on research by my former doctoral student, Scott Brooker, and me. Not surprisingly, the commentators didn’t go into any details about the way the predictions are calculated, so I thought I would explain the inner workings in a wonkish blog post.

The first thing to note is that the predictions are not forecasts that could be used to set TAB betting odds. Rather they are estimates about how well the average batting team would do against the average bowling team in the conditions under which the game is being played given the current state of the game. That is, the "predictions" are more a measure of how well the teams have done to that point, rather than forecasts of how well they will do from that point on. As an example, imagine that Zimbabwe were playing Australia and halfway through the second innings had done well enough to have their noses in front. WASP might give a winning probability for Zimbabwe of 55%, but, based on past performance, one would still favour Australia to win the game. That prediction, however, would be using prior information about the ability of the teams, and so is not interesting as a statement about how a specific match is unfolding. Also, the winning probabilities are rounded off to the nearest integer, so WASP will likely show a probability of winning of either 0% or 100% before the game actually finishes, even though the result is not literally certain at that point.

The models are based on a database of all non-shortened ODI and 20-20 games played between top-eight countries since late 2006 (slightly further back for 20-20 games). The first-innings model estimates the additional runs likely to be scored as a function of the number of balls and wickets remaining. The second innings model estimates the probability of winning as a function of balls and wickets remaining, runs scored to date, and the target score.

The estimates are constructed from a dynamic programme rather than just fitting curves through the data. To illustrate, in the first innings model to calculate the expected additional runs when a given number of balls and wickets remain, we could just average the additional runs scored in all matches when that situation arose. This would work fine for situations that have arisen a lot such as 1 wicket down after 10 overs, or 5 wickets down after 40 overs, etc.), but for rare situations like 5 wickets down after 10 overs or 1 wicket down after 40 it would be problematic, partly because of a lack of precision when sample sizes are small but more importantly because those rare situations will be overpopulated with games where there was a mismatch in skills between the two teams. Instead, what we do is estimate the expected runs and the probability of a wicket falling on the next ball only. Let V(b,w) be the expected additional runs for the rest of the innings when b (legitimate) balls have been bowled and w wickets have been lost, and let r(b,w) and p(b,w) be, respectively, the estimated expected runs and the probability of a wicket on the next ball in that situation. We can then write

V(b,w) =r(b,w) +p(b,w) V(b+1,w+1) +(1-p(b,w)))V(b+1,w)

Since V(b*,w)=0 where b* equals the maximum number of legitimate deliveries allowed in the innings (300 in a 50 over game), we can solve the model backwards. This means that the estimates for V(b,w) in rare situations depends only slightly on the estimated runs and probability of a wicket on that ball, and mostly on the values of V(b+1,w) and V(b+1,w+1), which will be mostly determined by thick data points. The second innings model is a bit more complicated, but uses essentially the same logic.

Now many authors have applied dynamic programming to analyse sporting events including limited overs cricket (see my previous post on this here), although I don’t know of any previous uses of such models in providing real-time information to the viewing public. Scott’s and my main contribution, however, is in including in our models an adjustment for the ease of batting conditions. I have previously blogged about our model for estimating ground conditions, here. Without that adjustment, the models would overstate the advantage or disadvantage a team would have if they made a good or bad start, respectively, since those occurrences in the data would be correlated with ground conditions that apply to both teams. Using a novel technique we have developed, we have been able to estimate ground conditions from historical games and so control for that confounding effect in our estimated models.

In the games on Sky, a judgement is made on what the average first innings score would be for the average batting team playing the average bowling team in those conditions, and the models’ predictions are normalised around this information. At this stage, I believe this judgement is just a recent historical average for that ground, but the method of determining par may evolve.

I gather that the intention is to unveil more graphics around the use of WASP throughout the season, with the system fully up and running by the time of the international matches against England. It’s going to be interesting listening to what the commentators make of the WASP. Last Friday’s game wasn’t the best showcase, since when Auckland came to bat in the second innings, their probability of winning was already at 92% and quickly rose higher. It was fun, though, hearing the commentators ask Wellington captain, Grant Elliot, who was wired for sound while fielding, what he thought their chances were given that WASP had the Auckalnd Aces at 96% at that point. Grant's reply was lovely: "Sometimes even pocket aces lose". This is worth remembering when (as will inevitably happen), a team has a probability of winning in the 90s but still goes on to lose.

An efficient pharmaceutical regulation system will balance the costs of mistakenly releasing bad drugs onto the market against the costs of taking too long to release good drugs. It's easy to point ex post to bad drugs that were released in error, but changing the system to be more rigorous will very likely also delay the release of good drugs.

Unfortunately, stories like this one have a much easier time finding people who've died due to bad drugs than finding those who have been saved because a good drug was approved more quickly in Canada than in the US.

Maybe there are system-wide improvements that can move Canada onto a more efficient frontier. But if you're on the frontier, you're always trading off the costs of killing people with bad drugs against the costs of killing people by delaying their access to drugs. The Macleans piece seems horrified that many serious drug dangers are found after a drug has come to market:

Meanwhile, the problem continues to grow. The need for change is reflected in a Canadian study that reveals that serious drug dangers are frequently identified after they come to market. Almost one-fifth (19.8 per cent) of 434 new active substances approved by Health Canada between 1995 and 2010 were later given serious safety warnings—some only months after approval—Joel Lexchin, a physician and professor in the school of health policy and management at Toronto’s York University, found. The study, published last month in the Archives of Internal Medicine, shows risks are higher for drugs fast-tracked in 180-day “priority reviews” (versus the 300-day norm): 34.2 per cent had serious warnings.

Sure. But we have to weigh things. If a third of fast-tracked drugs had serious warnings after they came to market, then two-thirds didn't. We have to weigh any costs experienced by folks getting the bad third against the benefits of quicker access to better drugs for the people getting the good two-thirds. How many people would Canada kill through delay if they decided to make the procedures so strict that every single possible danger was identified before drugs were released?

Wednesday, 21 November 2012

Lost $NZD 636.77 at iPredict going long Romney. I should have lost $679.68, but backed out of some of my Romney position when things were looking clear. I'll count $679.68 as arbitrage loss; I did take on some minor risk in reversing some of my Romney position.

I made a series of credit card deposits to InTrade, ultimately reaching the $5000 US limit. My NZ card was charged $6209.96 for the USD$5000 deposit.

I sent BetFair AUD$1000 to buy Romney; BNZ charged NZD$1286.51 to my card. I'll add $15 AUD to that to cover the money I there pulled from my standing account as BetFair charges 1.5% on deposits. So NZD $1305.81 lost at BetFair.

Total costs then were NZD $8195.45

InTrade wired me USD$7373.65 - my deposit, plus my winnings, less the $20 my account was in the red when I deposited, less a $20 bank wire fee charged by InTrade. This turned into NZD $8915.89, less a $15 wire charge from BNZ: $8900.89.

It took a fairly long time to get the money out of InTrade; I requested the withdrawal on the 7th of November; it arrived on the 19th of November. Fortunately, the credit card isn't due for a couple more days.

Somebody charged me an implicit currency exchange fee: Yahoo Finance cites rates of $0.818 for Monday, 19 November; $7373.65/$8915.89 = 0.827. This matters on these kinds of plays: had I been charged the interbank rate rather than somebody along the way taking a cent on the exchange rate, I'd have received $9014.24 instead of $8915.89. Because of the long lag between the withdrawal request and the relative volatility of the $NZD, you need some reasonable expected gains to be sure you don't lose out. Every one cent move in the $NZD costs about $100. If I'd only had expected arbitrage gains of $200, the realised amount could halve or increase by 50% ridiculously easily.

$8900.89 - $8195.45 = $705.44 net profit.

UPDATE: Wow. I entirely forgot this one. I've a BNZ Platinum that gives me $1 in Airpoints Dollars for every $90 spent. So I get $91 in AirPoints dollars.

I phoned IRD. They count this as winnings on betting and those aren't taxed. I did note that iPredict is a futures exchange for regulatory purposes in New Zealand; they didn't much care. The woman on the phone said that if I were trading on these every day so that it were more like income, then it would count. But one-offs like this are fine. I didn't ask how it would be treated if someone set up a Kiwisaver fund that accepted investments for trading on these markets.

Because it took almost two weeks to get my earnings out of InTrade, I was exposed to unhedged currency risk, making this not a pure arbitrage play.

Lesson: it's worth having standing accounts across a range of trading platforms. It takes far too long to set up an account to only do it when an opportunity comes up. Arbitrage gains are real, especially when a whale lands like the one that seemed to be trading at InTrade propping up Romney's price. But it takes a reasonably large price spread across markets. A one-cent spread covers the bank's exchange rate charge one-way; a two-cent spread covers two-way bank exchange rate charges; a three-cent spread covers the exchange charges plus half of BetFair's deposit fees; a four-cent spread leaves you a small amount of arbitrage gain but exposed to currency risk.

And be careful if you're financing this on the credit card: if the expected payout date plus a fortnight is after your credit card is due, your costs are going to be higher.

Tuesday, 20 November 2012

Treasury has been doing a lot of great outreach work. The Government Economics Network has been working to bring a bit more economic understanding to the rest of government; as part of that, GEN, in conjunction with U Vic, has been sponsoring some rather interesting debates.

Coming up this Friday, NZIER's John Yeabsley will argue that Treasury's standard 8% discount rate for public sector projects is too high; U Vic's Professor Martin Lally will provide the opposition. The Ministry of Health's Bronwyn Croxson serves as commentator. The Victoria University Chair in Public Finance is running the event, sponsored by the GEN [thanks, Cherry, for the correction]. Other debates in the series are here.

Monday, 19 November 2012

One thing that struck Matt and me when going through the alcohol literature was co-morbidity between heavier alcohol use and a whole pile of other bad things. We wrote:

We also worry that the aetiological fractions used may not account adequately for comorbidity between alcohol use and pre-existing mental disorders. The aetiological fractions used ascribe between twenty-five and thirty percent of male suicides to alcohol; in other words, if alcohol disappeared, the suicide rate would drop by more than a quarter for adult males over the age of twenty. As alcohol use can often be a form of self-medication among those with mental illness, whether alcohol plays that substantial a
causal role in suicides is debatable. Ross (1995) finds that more than half of those with an alcohol disorder have a lifetime comorbid psychiatric disorder. Among subcategories for which data is presented, alcohol abusers have rates of mood disorders and anxiety disorders 2.3 and 1.7 times that of non-abusers. While 9% of alcohol abusers report antisocial personality disorders, only 0.6% of non abusers report such disorders. The Mental Illness Fellowship of Australia (2005) notes that those with bipolar disorder are eleven times more likely to engage in harmful drug or alcohol use than is the general population. Kessler et al (1997) find that those with long term alcohol abuse or dependence not only have a high probability of also exhibiting another mental disorder but also that comorbid DSM-IIIR disorders tend to predate alcohol use disorders.

Some people with pre-existing disorders self-medicate with alcohol and consequently are better off than they would have been but worse off than average; their variance from average outcomes is counted as a cost of alcohol. Some people with pre-existing disorders self-medicate with alcohol and consequently are worse off than they otherwise would be; the total amount of their variance from average outcomes is counted as a cost of alcohol rather than only the incremental worsening from their individual baselines. This stuff isn't easy. But the direction of the bias is pretty clear.

Emma Hart at Up Front [not guaranteed safe for work] points to more work in similar vein: bisexuals are more likely to have problems with binge drinking. And it's because of underlying social pressures. She writes:

Here’s a clue, guys: it’s not the drinking, it’s the why they’re drinking. Take a lesson from gaynz.com, and maybe work out why I link to so many stories there instead of at your place: Exclusion Leading Some Bi Youth to Binge Drink. The drinking is not the problem, it’s one of the symptoms of the problem.

She then quotes from the study's surveys of young binge-drinking bisexuals:

I drink more when I’m under high stress, when I’m stressed out, and maybe sometimes at parties when, after conversations with people, where they want to know, no one gets the bi thing. It’s really hard to explain. Quite a bit because you get people who want to know why you are not lesbian, why you are not straight, and I kind of feel that, it’s slightly easier to be one or the other, like I envy some of my friends who are gay, I’m like you know who, you know you’re there and no one questions it. But I get questioned all the time, and I find that frustrating sometimes.
...
Arahia: You kind of drink more so you can say the next day: “Oh, I was just drunk, you know. It didn’t mean anything really.” Sometimes it does, sometimes. But if you wake up the next morning with a huge hangover, you can say to the person: “Oh god, it didn’t mean anything. I was just so wasted.”

Fiona: “Didn’t mean to grope you. I was just drunk.”

Arahia: It is such a good excuse.

Fiona: And I think bi people definitely use it as more of an excuse than any other sexual orientation.

Saturday, 17 November 2012

Professor Flynn is trying to help you improve your mind. My review of his latest book should be in today's Christchurch Press. They gave me 450 words; I took 480. Here they are.

Professor Jim Flynn sets a clever trap in his latest book, “How To Improve Your Mind”. Promising that all readers will “be far more able to defend their position after reading it than before”, Flynn instead provides the critical tools necessary instead for reassessing the irrational beliefs each of us hold and, in so-confronting, end them. For your own good, you should let yourself be trapped.
Jim Flynn is arguably New Zealand’s best social scientist. I disagree with him on some aspects of economic policy, but Professor Flynn is a truth-seeker. And, even better, he’s very often a truth finder. Here, he helps the rest of us be better truth-seekers. This is no mean task. Thinking rationally is hard and, often, unpleasant. Worse, there is no payoff to rational thinking in many areas of life; you will hardly be less successful in most occupations if it gives you pleasure to believe that the earth is only a few thousand years old. But I’ll return to this.

Flynn ably demonstrates the methods of rationality through a series of case studies of beliefs that contravene the methods. He also warns against the tricks used by policy advocates against those not appropriately armored against them.

I disagree with a few of the finer points in Flynn’s chapters on economics. For example, even if the reservation wages of second earners are lower than those of primary family earners, this will not drive down female wage rates unless we add assumptions around segmented labour markets. Further, decent labour standards seem to owe more to higher incomes and increased productivity than they do to Twentieth Century regulatory interventions. In developing countries, child labour is very sensitive to family income; when parents can afford to do so, they send their kids to school. And he is perhaps a bit too optimistic about the feasibility of ameliorative regulatory reform in financial markets. But Flynn has a sharp nose for the failures of rational thinking about economics among those whose values he shares – he correctly sees negative income taxes as better than a minimum wage for helping those he would wish to assist, though he misses that cleverer forms of the negative income tax solve some of the problems he highlights.

The bigger question, and the one harder to answer, is why to choose rationality in the first place. Flynn writes, “If you learn how to use logic and evidence to examine your own principles, and the principles other people urge upon you, you can enlist in the ranks of mature moral agents rather than in the army of stones.” But it’s an expensive endeavour – not unlike taking the Red Pill offered Neo in The Matrix. I’d be surprised if more than a quarter of the population even tries to choose rationality over comforting illusions. But if you’d like to try to try, Flynn’s book is a good start.

One bit that wasn't relevant for the Christchurch Press but I found awfully interesting was this observation:

"Academic competition for grades in a particular
course selects out an elite that gets an A+. But within some areas, the
correlation between courses is far more perfect than within others. Within
mathematics, the best student in differential equations is likely to be the
best student in algebraic geometry and in number theory, and so forth. Within
political studies, the best student in political behaviour is less likely also
to be the best student in areas as diverse as international relations,
political philosophy, and quantitative methods. So, talented math students will
come to scholarship committees with a string of A+s, and talented political
studies students with a mix of A+s and
As. Rather than putting all the math students at the top, the obvious thing
would be to alternate science/math students with arts/social science students.
Observe how quickly math professors forget what they know about regression to
the mean when such a proposal is put."

I'm on the Scholarships Advisory Committee as the Commerce rep; we help advise on policy around scholarships. I wonder how much this affects our University-wide awards. Economics probably doesn't do horribly out of this kind of overall effect: more than any of the other arts or social sciences, there's likely an underlying e-factor - thinking like an economist - that explains variance across students. At least in microeconomics. But arts and social sciences in general will do worse than the bench sciences and maths.

I wonder if anybody has run the test. If Flynn is right, then we expect lower variance in course grades for maths and science majors than for arts and commerce majors. We can use incoming high school grades as a measure of baseline ability. We could observe higher variance among the best students in arts courses than among the best students in maths courses simply because of grade truncation issues if the very best of all students pick maths over arts. I think I'll add the "future honours project proposals" tag; this seems testable.

Update: Oops...didn't see it in today's paper. Likely in next week's then.

Friday, 16 November 2012

It's not crazy to argue for the combination of a lower alcohol excise tax and a minimum per-unit price for alcohol if harm-causing drinkers disproportionately choose the cheapest plonk while moderate drinkers choose more expensive drinks. The anti-alcohol lobby likes to point out that moderate drinkers on average choose more expensive beverages, but this really doesn't tell us anything without a correction for income - if heavy drinkers disproportionately come from poorer cohorts, and if poorer people of all drinking intensities choose cheaper products, then income cohort effects confound things.

Consider though the Lindauer Rose, a bubbly that often retails around the $9 mark. It's 12% alcohol, so it's around 7 standard drinks. Labour's preferred $1.50 or $2 per standard drink minimum price would bind on the Lindauer Rose. Cheap plonk consumed by harmful drinkers? Or an Air New Zealand Wine Awards Gold Medal winner?

If the cheaper alcohol categories include nicer drops very plausibly chosen by moderate drinkers on a budget (or even ones at which I'd turn up my nose, so long as preference heterogeneity is allowed), we really really need to worry about harms imposed on moderate drinkers when weighing the effects of minimum pricing on harmful drinking.

I first show that the taxation of advertising is indeed a powerful instrument to restrict advertising expenditures of firms. I also show that advertising increased consumer prices in some industries such as alcohol, tobacco and transportation, in which the persuasive effect dominates. But it also decreased consumer prices in other industries such as food. I use data from existing marketing studies which make it possible to relate different responses of market prices to characteristics of advertisements in industries. I can indeed show that those industries which exhibit the informative price include more information in their advertisements, consistent with the interpretation of informational and persuasive forces of advertising.

I expect what's going on with persuasive advertising is mostly brand-loyalty reinforcement. The test for that would be whether the gap in price between branded and unbranded soft-drinks decreased with higher advertising taxes; that test isn't reported in the paper, and I'm not sure if it's feasible with their data. But it's at least a falsifiable hypothesis.

Most tobacco advertising is illegal; New Zealand is debating mandating plain tobacco packaging.* The tobacco industry's been pretty angry about plain packaging. If brand labelling mostly works to reduce competition across brands and to help maintain customer loyalty, we'd expect that plain packaging mandates will lead to a shift towards discount brands and lower prices absent further excise hikes. And that's also what Clarke and Prentice expect.** You can simultaneously have a policy anger the tobacco industry while increasing smoking if it pushes current smokers to discount brands, reducing the average price they pay and consequently increasing consumption while decreasing industry profits. The policy that's the enemy of your enemy isn't necessarily your friend.

*Or, rather, the anti-tobacco groups were shouting a lot about the need for it, perhaps encouraged by MoH. Sometimes-lobbyist Carrick Graham points out the NGOs went quiet in preparation for the TPP talks' coming to town, implying that they're mostly client groups for the Ministry of Health and that MoH was leaned on a bit by Trade. It's an interesting hypothesis.

Thursday, 15 November 2012

New Zealand ranks first on our list of the Best Countries for Business, up from No. 2 last year, thanks to a transparent and stable business climate that encourages entrepreneurship. New Zealand is the smallest economy in our top 10 at $162 billion, but it ranks first in four of the 11 metrics we examined, including personal freedom and investor protection, as well as a lack of red tape and corruption.

I wish that their rankings on personal freedoms were more granular; NZ and the US both get a 1st place ranking. On average, I'd put NZ a fair bit higher than the US, though recent referenda in Colorado and Washington State may yet wind up changing that.

I used to say that personal freedom cannot be the most important thing to you if you live in the US and haven't tried emigrating to New Zealand. It's fine to trade personal freedom for income, but not to do so while claiming the paramount importance of freedom. But if your bundle of freedoms includes marijuana, you're now better off moving to Washington State or Colorado.

I hope that New Zealand looks hard at marijuana legalisation, with regulated markets like those for alcohol. We can't be the outside of the asylum if America gets more sane than us on drug policy.

“There’s much to like in the [Green growth] report. It rightly recommends that New Zealand move toward more efficient pricing and trading of water resources. Similarly, they recognize the opportunity for New Zealand to make a global difference by directing research and development resources towards lower-emission pastoral systems – so much the more so if New Zealand were to release the developed technologies under Creative Commons license as our contribution towards reducing global warming. Streamlining regulations to let entrepreneurs take advantage of New Zealand’s natural potential comparative advantages in aquaculture also is well worthwhile.

“I worry that some of the identified opportunities may impose cost well in excess of potential benefit.

“While more energy-efficient buildings would be very nice to have, regulatory mandates in the area often have perverse effects. For example, mandates that homes undergoing renovations also be brought up to higher energy efficiency standards can encourage people to avoid renovating their homes. Financing programmes assisting those already undertaking renovations for earthquake-strengthening to improve energy efficiency at the same time would be more effective; by contrast, EQC in Canterbury has been barring homeowners from undertaking any energy-efficiency improvements while repairing earthquake damage.

“Imposing carbon dioxide emission standards on New Zealand vehicles, when we do not make vehicles, mostly shifts to other countries those used cars we would have bought. We already have seen evidence of reduced used car availability and higher prices consequent to the government’s recent regulatory measures that effectively barred Japanese imports produced prior to 2005. Further, shifting towards greater use of electric cars because of New Zealand’s low electricity emissions-intensity would only work if we were able substantially to expand our base of hydroelectric or geothermal generation.

“I was somewhat surprised to see no recommendations around allowing well-regulated hydraulic fracturing technology for natural gas extraction. Wave and tidal power are worth investigating, but remain rather too uncertain to bank on. Greater use of natural gas powered thermal electricity generation is likely New Zealand’s best bet for lower emissions intensity power generation in the absence of substantial breakthroughs in other energy sources.”

I'll add a bit here.

As best I understand things, coal is now part of our baseload generation capacity. Huntly runs all the time, their gas turbines are easier to fire up and scale down for peaking than are their coal units, and our hydroelectric stations are obviously better as peaking units. Adding electric cars adds to baseload demand, so we need more baseload capacity. That's ideally hydro, which is banned by the environmentalists / water spirits people. Wind can be part of our baseload because it can be partnered with hydro: when the wind blows, we can dial back the hydro plants and save the water there for times when the wind is calmer. But, that means they need to service the same demand points as our hydroelectric stations. And hydroelectric plus lots of wind means the Canterbury High Country. And the environmentalists / scenery people have banned our putting wind power there too because it would make a tiny percentage of that scenery look different. So that's out too.

Fracking can be done safely - from my read of the literature, whatever problems there have been in some cases with water contamination can be avoided by techniques that only slightly increase the cost of extraction. Getting more access to cheap natural gas in New Zealand can displace what coalfire generation we are running and gives us room to expand generation capacity at lowest environmental cost given the existing political constraints. But the Greens have pushed to ban that too, and have succeeded in getting a pile of Councils to ban it within their catchments.

What's left? Maybe more geothermal. Tidal remains a bit of a pipe dream - I hope we can get there someday, but I'd sure want it on-stream and running before pushing everybody into electric cars. Solar faces some of the same constraints as wind - it's a great complement to hydroelectric and lets us store electricity in the form of lakes-not-yet-run-through-turbines when the sun shines. And maybe it'll be low enough cost sometime soon that we'll be able to use it. And I wonder whether the same "Oh but I hate everything that changes anything" people will work to ban solar plants near our hydroelectric stations in the same way that they're putting wind into the "too hard" basket.

Pushing more demand onto the grid, without getting more capacity on the grid, is a bit scary. I like the stuff in the report about getting more active demand management systems. That will help smooth out some of our peaking issues. But we need more baseload if we want electric cars sometime down the track. It's not obvious how we get there from here.

Bottom line: the report seems to be a re-tread of well-known issues with a recommendation to spend more public money to help private businesses. When it comes to really difficult issues — what trade-offs are we willing to make? how do consumers symbolise environmental values through economic transactions? — it seem to fall silent. Maybe somewhere in those 300 pages they grapple with the hard stuff. If so, Pure Advantage will have gotten its money’s worth.

Wednesday, 14 November 2012

The University's press guy emailed asking if I might comment on this. Markia Hill reports for Fairfax on a new report showing binge drinking rates are up for 16-17 year old girls. From the story:

Senior secondary school girls are now bigger binge drinkers than their male counterparts, according to a health report into the country's drinking habits.

With the bigger boozing culture, females are also doing themselves more harm and risking their health.

The hard-hitting report into the female drinking culture was released at an alcohol harm conference in Auckland today.

The percentage of females aged 16 and 17 binge-drinking on a typical night out tripled from nine to 28 per cent between 1995 and 2011.

For males of the same age, the percentage increased from 19 to 25 per cent. Binge-drinking has dropped among 18 and 19-year-old males from 30 to 29 per cent.

However, for the same age group of females, the proportion of binge-drinkers increased from four to 16 per cent.

The story has no link either to the conference or to the paper. I expect that the paper was part of the "Harm to Harmony" conference that the anti-alcohol folks are running. The conference programme has links to no papers. If there's a new Alcohol Healthwatch survey out on youth drinking, it's nowhere on their website. If ALAC put out a new report, it's not on their website - the last one they have is the ALAC Alcohol Monitor 2009-10, released Feb 2011.

So all I can say is that prior data showed no particular increase in youth drinking. The Social Report showed no increase in "potentially hazardous drinking" among 15-24 year olds from 1996/97 through 2006/07. From that report:

Table H6.1 Proportion (%) of adult drinkers with a potentially hazardous drinking pattern, by age group and sex, 1996/1997, 2002/2003, 2006/2007

Age group (years)

15–24

25–34

35–44

45–54

55–64

65–74

75+

1996/1997

Male

49.8

35.7

25.5

25.2

21.1

12.6

7.3

Female

31.6

13.9

8.1

6.0

1.8

1.0

0.8

Total

40.8

24.9

17.1

16.0

12.0

7.3

3.9

2002/2003

Male

45.8

36.1

28.0

23.5

18.1

16.4

4.4

Female

31.0

16.0

9.3

7.1

3.0

1.1

1.0

Total

38.7

26.1

18.7

15.7

10.8

8.7

2.7

2006/2007

Male

49.2

36.2

29.0

21.1

23.1

14.7

7.9

Female

32.6

18.2

9.5

7.3

4.3

3.0

2.5

Total

41.1

27.1

19.2

14.2

14.0

9.1

5.2

Source: Ministry of Health

I can't see any increase in hazardous drinking among young women in that data.

ALAC's last report had females as 52% of the cohort of young binge drinkers in 2005-6, as in "52% of all young binge drinkers aged 12-17 were female", not as in "52% of young women were binge drinkers". In 2007-8 it was 45%; in 2009-10, it was 47%. So the number bounces around a bit. If women outnumbered men in the last survey, it would be repeating what the survey found in 2005-6. The 1997-2000 survey didn't split things by gender, so I can't comment on what was going on in '95. But there was no particular increase in aggregate youth binging from that survey through to the last report.

Eventually, they'll put the paper up. After the media cycle has moved on. I don't hate getting calls from the University's press guy asking for comment on stuff where I've been watching the literature closely. But I get annoyed that the antis have worked a nice trick of getting Fairfax to report uncritically on anything they put up while making sure any potential critics don't have access to whatever they've already gotten in press until after the media are interested in other things.

The last time I got sniffy about not being given access to a much-reported-on-but-not-released report, I got a surprising email back along with the report. I'd noted that it was a bit off that they'd gotten two or three stories in press about a piece of research that was nowhere available; they replied that had it been available to me early, it might have led to imbalanced reporting.

I've not yet bothered asking for a copy of this one. But if the University's press guy gets a copy, I'll have a look at it.

Update: A correspondent asked the presenter for a copy of the paper; no written paper yet exists for critique.

Why?! Gender pay gaps arise for a number of reasons and only some may be worrying. Unless we know the reasons for a pay gap, we can’t conclude anything about its desirability. See the famous Oaxaca decomposition and the ton of research that has been done on the topic. For example, women often choose part-time employment as it suits their personal lives (they may prefer part-time employment to no employment but would prefer no employment to a full-time job). It honestly frightens me when people draw angry conclusions from raw numbers. Angela MacLeod admitted the Coalition was not sure of reasons for the pay gap change but said “a higher proportion of women in part-time work had not helped”. Helped whom? Helped what? Help us someone! Help us write better commentaries on such issues.

I agree entirely. In particular, it is nonsense to compare average wages without correcting for education, time outside the workforce, industry, or full-time and part-time status. The QES's tables only give a gender breakdown for average hourly wages, though I'm sure Stats NZ could provide more detailed gender cross-tabs on request. Part-time workers typically earn less per hour than full-time workers; if more women than men take on part-time arrangements voluntarily, and we don't correct for that, we overstate the gap. Same for correction for industry and the like.

The New Zealand Income Survey gives us a somewhat different picture - again, only comparing raw figures. For the June 2012 quarter, average female hourly earnings from wages and salaries were $23.35 to the $26.75 earned by men: men earned 14% more on average. But if we look at median hourly earnings, the gap is only 10%: $22 for men compared to $19.95 for women. And, better, the NZ Income Survey lets us compare full time and part time earnings. Again, the raw gaps above were 14% in averages and 10% in medians. If we compare full-time workers, men earn (median) $23 per hour to the $21.58 earned by women: a 6% gap. Comparing part-time workers, men earn $15.50 per hour and women earn $16.25 per hour. So, in the Income Survey, you can abolish almost half of the wage gap by considering only full-time workers, and reverse the darned thing if you look at part-time workers.

Table 11 of the last NZ Income Survey is awfully telling. Where twelve percent of men work part-time, thirty-five percent of women do. Cohort differences in the choice to work full or part time drive the bulk of the observed wage gap. And it would be surprising if correction for industry, work experience, time outside of the workforce, and education didn't wipe out most of the rest.

Professor Johnson, in the Scoop press release, cites other research:

Research, including some conducted by Professor Johnston, has shown the continued existence of such stereotypes and the impact they have on recruitment and promotion processes - often without the awareness, or explicit endorsement, of the evaluators.

Women were evaluated less positively than men with identical qualifications and experience when applying for jobs typically filled by men, such as management positions. Women are more likely to be successful in such applications if they dress and talk in a more masculine way – wearing a suit rather than a dress and having a deeper voice, she said.

``Role models and encouragement are essential for young women and we must make every effort to promote and endorse successful women and we must ensure that to become successful women do not need to become `like men’.

It's true that in audit studies, we can find employers who discriminate. But, in equilibrium, it's not likely that they drive aggregate wage differences. There's also evidence that women are less aggressive in salary negotiations than are men, which also contributes to wage gaps. But is that really discrimination?

Finally, suppose that you ran all the regressions and controlled for all the human capital characteristics and still found on wage decomposition that young women earned less than comparable men. There's still something for which you haven't corrected: an employer hiring a young woman faces greater risk that his employee will take 3-12 months of leave. Sure, maternity leave is paid for by the government rather than by the employer, but the employer still bears costs in accommodating the leave.

There will be more here sometime in the next few months on maternity risk and wage gaps. Stay tuned.